Instructure Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Instructure's third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that this conference is being recorded. I would now like to turn the conference over to your first speaker, April See, Investor Relations. April, please go ahead.

Good afternoon and welcome to Instructure's third quarter 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are Instructure's Chief Executive Officer, Steve Daley, and Chief Financial Officer, Dale Bowen. Before we begin, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For discussion of the factors that could affect our future financial results in business, please refer to the disclosure in today's earnings release and other reports and filings we file from time to time with the Securities and Exchange Commission. All of our statements are made as of today based on information available to us today, and except as required by law, we assume no obligation to update any such statements. During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted in the investor relations section of the website. All of our non-revenue financial measures we discussed today are non-GAAP unless we state that the measure is a GAAP measure. With that, let me turn the call over to Steve.

Thank you, April, and good afternoon, everyone. Thank you all for joining us for our third quarter 2022 earnings call. During today's call, Dale and I will provide an overview of company results for the third quarter and provide fourth quarter and updated full year 2022 guidance. Instructure delivered another strong performance in the third quarter, exceeding our guidance across all metrics as we benefit from the digital transformation of education, favorable federal funding dynamics, our strong reputation for innovation, and leading market positions. Third quarter gap revenue was $122.4 million, up 14.2% year over year, while allocated combined receipts, or ACR, was $122.5 million, up 12.8% year over year. We think ACR, which adds back the impact of fair value adjustments to acquired unearned revenue, gives investors better visibility into the underlying growth of our business. We delivered this growth while continuing to demonstrate the strength of our business model, with a non-GAAP gross margin of 77.8% in the third quarter, up roughly 90 basis points year over year. as we optimize our third party technology costs and improve the efficiency of our support operations. Third quarter adjusted EBITDA grew 15.4% year over year to $47.6 million, a 38.9% margin of ACR, as we further demonstrated operating leverage on both the gross margin and adjusted EBITDA lines. I'm proud of these results and excited about the future and want to thank our employees for their continued dedication. I'd now like to review three things. Our results across the K-12, higher education, and international markets, continued evidence that our platform strategy is working, and our progress penetrating non-traditional education opportunities. First, across our K-12, higher education, and international businesses, our focused go-to-market and expanded set of offerings are driving continued strength and bringing new logos onto the platform. Starting with North American K-12, Market research firm List EdTech reported last month that 33% of all districts are using Canvas, displacing Google Classroom as a share leader in this segment of the market. We are proud of this achievement and continue to see high win rates. Our pipeline remains very healthy, and budgets for digital transformation projects are robust as ever, with 70% of ESSER funds yet to be invested, according to the Department of Education. However, record teacher retirements in strained capacity are slowing decision-making and impacting K-12 sales cycles near term. On the other hand, we continue to hear from K-12 decision-makers that Instructure products are more critical than ever. This validates the long-term demand for our platform, and we expect the funding environment to remain favorable for the foreseeable future. We remain confident we will continue to gain share in K-12 because of the essential role the Instructure learning platform plays in the classroom in the post-pandemic era. For example, we converted a 600-student pilot program with Wichita Public Schools, a large K-12 district, to a district-wide implementation of Canvas with a plan already in place to expand the instructional learning platform further once Canvas is live. Now, turning to North American higher education. Canvas is a leading learning management platform with more than 40% market share. Win rates remain high as higher education institutions continue to select Canvas for ease of use scalability, flexibility, and superior user experience. During the quarter, the University of Texas San Antonio selected Canvas as its LMS, replacing a long-term relationship with one of our larger competitors. UTSA was already using our Impact product, and after a long evaluation process, decided to migrate to Canvas because of our engaging learning platform and the power of combining Canvas, Studio, Catalog, and Impact. Looking ahead, we expect North American higher education growth opportunity to remain strong, as nearly 40% of higher education institutions in the U.S. still use legacy LMS systems, providing plenty of opportunity. Finally, international remains the fastest growing part of the business during the third quarter, up 21.5% year over year. Our international market focuses on a narrow group of markets where we go direct, like Ireland, where there is strong connectivity, a high student-to-device ratio, and a propensity to spend on education. During the quarter, the University of Galway selected Instructure Learning Platform after a lengthy evaluation process due to its world-class user experience and unrivaled interoperability. As you know, we also launched a channel program in January of this year, and that enables us to cost-effectively enter new international markets and address the next year of growth. And we are gaining momentum, adding 13 value-added resellers. Looking ahead, The international higher education LMS market share that we have is in the single digits. We expect this segment to remain our fastest growing segment in the year ahead. We believe the international business will continue to drive durable growth as institutions continue to upgrade from legacy, open source, and sluggish on-premise systems. Second, I want to talk about the growing success of our platform strategy. During the quarter, our instructor learning platform strategy gained further traction with strong success with both cross-sell and up-sell. Since 90% of instructional workflows are facilitated by an LMS, we are well positioned to cross-sell additional modules. During the quarter, we saw several examples, including the Providence School District, which, after a competitive RFP process, added Elevate and Mastery Connect onto an existing Canvas base due to our ability to scale assessments and curriculum across the district. We also saw a meaningful win with the Iowa Department of Education, including implementations for more districts and also adding Studio to their state contract. Looking ahead, we are still in the early innings on cross-sell and see meaningful opportunity. Our current product portfolio alone represents roughly a $750 million cross-sell opportunity in our existing customer base. We expect to continue investing in the platform through organic development and M&A as we increasingly connect every aspect of teaching and learning and expand our addressable markets. Finally, I wanted to update you on successes with nontraditional education opportunities. We believe our investments will contribute to long-term durable growth, and we are excited about the early traction we are seeing. Canvas, when combined with catalogs, studio, and credentials, increasingly allows universities to address not only individuals within the four walls, but also those beyond it. We are also seeing strong interest from innovative institutions that are looking to us to harness nontraditional education opportunities that expand their addressable market. Our focus on innovation and our ability to creatively address opportunities in a changing higher education landscape drove several wins during the quarter, including Arizona State University. ASU has been a longtime strategic customer and has now chosen Canvas to power ASU's Thunderbird School of Management's 100 Million Learners Global Initiative. This initiative aims to offer online global education in 40 different languages to learners across the globe, 70% of whom will be women. We believe this advances Thunderbird's mission to empower and influence global leaders and advance equitable and sustainable prosperity worldwide. And in structure, we share ASU's mission to improve the world through education, and we are proud to power this initiative, which is one of the many ways we are advancing our strategy to address the estimated $5 billion non-traditional online market opportunity. We also had a large win with PeopleCert, a leading provider of professional assessments and certifications that does the majority of its business outside the U.S. As part of their digital transformation and business growth strategy, PeopleCert chose Canvas as the learning management system that will deliver training to its 250,000 learners on their journey to certification. PeopleSearch chose Canvas due to our ability to scale their worldwide application, and this partnership helps us cost-effectively enter new international markets. In summary, I am confident and optimistic about our business. Even with the challenges our K-12 customers are facing, we believe the diversification of our business across higher education and K-12, with leading shares in North America and growing market share across the world, positions us for long-term durable growth. In addition, we believe our focus on continuous improvement will drive enhanced profitability versus our already industry-leading margins. And we'll now turn the call over to Dale to talk about our third quarter financial results.